Just days until LIBOR switch to SONIA: FCA measures likely to postpone potential wave of litigation, for now
With the deadline for banks to stop using LIBOR as an interest rate benchmark just a few days away, new measures taken by the Financial Conduct Authority (FCA) mean a possible wave of litigation will likely be avoided for now, though it could be “a problem postponed, rather than solved”, a leading Square Mile lawyer has told City PM
The FCA recently announced it would relax the January 1, 2022 deadline for financial services to stop using LIBOR as a reference rate in contracts, which many feared would lead to disruption and a wave of litigation.
With the FCA recently confirming that an unexpectedly wide range of legacy contracts would be permitted to use the ‘synthetic’ LIBOR rates through 2022, it is likely this litigation will be postponed.
LIBOR to SONIA
The transition from LIBOR to SONIA, the principal replacement rate for sterling LIBORs, will produce many ‘winners’ and ‘losers’, according to Dan Hemming, partner in banking disputes at law firm RPC.
SONIA is a different interest rate from LIBOR and cannot easily be adjusted to produce an identical economic outcome. Those on the losing side of the transition may have looked to sue if they felt they were unfairly treated in the transition.
If there had been no agreement to publish a synthetic LIBOR or the scope of contracts permitted to use it had been narrower, banks would have to spend the last weeks of December trying to renegotiate all contracts with LIBOR written into them under ever-increasing pressure.
“The hard stop to LIBOR in the FCA’s original timetable of December 31 threatened to make the last month of the year extremely tense and chaotic for financial institutions and their customers. It looks like the FCA has been pragmatic and blinked,” Hemming said.
“Without the wide use of synthetic sterling LIBORs being permitted for 2022 we could have well seen a surge in litigation in the new year, particularly in connection with bonds where the transition away from LIBOR has presented the greatest practical difficulties.”
Dan Hemming, partner in banking disputes at law firm RPC
“This softening of the FCA deadline will be welcomed by many. However, the FCA has made clear that those with legacy LIBOR contracts must use this time to properly transition away from LIBOR,” Hemming added.
However, one of the challenges faced is that LIBOR has been used across such a wide variety of contracts for such a long period.
“For some types of contract, especially bonds, consensual renegotiation is likely to be very difficult, and sometimes impossible. This means that it could be a problem postponed rather than solved and the FCA is offering no assurances about the use of synthetic rates beyond 2022,” Hemming concluded.